|(1)||Trade-Related Investment Measures
In the late 1980's, there was a significant increase in foreign direct investment throughout the world. However, some of the countries receiving foreign investment imposed numerous restrictions on that investment designed to protect and foster domestic industries, and to prevent the outflow of foreign exchange reserves.
Examples of these restrictions include local content requirements (which require that locally-produced goods be purchased or used), manufacturing requirements (which require the domestic manufacturing of certain components), trade balancing requirements, domestic sales requirements, technology transfer requirements, export performance requirements (which require the export of a specified percentage of production volume), local equity restrictions, foreign exchange restrictions, remittance restrictions, licensing requirements, and employment restrictions. These measures can also be used in connection with fiscal incentives as opposed to requirement. Some of these investment measures distort trade in violation of GATT Article III and XI, and are therefore prohibited.
Until the completion of the Uruguay Round negotiations, which produced a well-rounded Agreement on Trade-Related Investment Measures (hereinafter the "TRIMs Agreement"), the few international agreements providing disciplines for measures restricting foreign investment provided only limited guidance in terms of content and country coverage. The OECD Code on Liberalization of Capital Movements, for example, requires members to liberalize restrictions on direct investment in a broad range of areas. The OECD Code's efficacy, however, is limited by the numerous reservations made by each of the members.
In addition, there are other international treaties, bilateral and multilateral, under which signatories extend most-favoured-nation treatment to direct investment. Only a few such treaties, however, provide national treatment for direct investment. Moreover, although the APEC Investment Principles adopted in November 1994 provide rules for investment as a whole, including non-discrimination and national treatment, they have no binding force.
GATT 1947 prohibited investment measures that violated the principles of national treatment and the general elimination of quantitative restrictions, but the extent of the prohibitions was never clear. The TRIMs Agreement, however, contains statements prohibiting any TRIMs that are inconsistent with the provisions of Articles III or XI of GATT 1994. In addition, it provides an illustrative list that explicitly prohibits local content requirements, trade balancing requirements, foreign exchange restrictions and export restrictions (domestic sales requirements) that would violate Article III:4 or XI:1 of GATT 1994. TRIMs prohibited by the Agreement include those which are mandatory or enforceable under domestic law or administrative rulings, or those with which compliance is necessary to obtain an advantage (such as subsidies or tax breaks).
Figure 8-1 contains a list of measures specifically prohibited by the TRIMs Agreement. Note that this figure is not exhaustive, but simply illustrates TRIMs that are prohibited by the TRIMs Agreement. The figure, therefore, calls particular attention to several common types of TRIMs. We would add that this figure identifies measures that were also inconsistent with Article III:4 and XI:1 of GATT 1947. Indeed, the TRIMs Agreement is not intended to impose new obligations, but to clarify the pre-existing GATT 1947 obligations. Under the WTO TRIMs Agreement, countries are required to rectify any measures inconsistent with the Agreement, within a set period of time, with a few exceptions (noted in Figure 8-2).
The TRIMs Agreement is only a first step toward eliminating trade distortions. Although some policies, such as certain export requirements, are not expressly prohibited by the TRIMs Agreement, it is important that governments understand the capacity of such measures to distort trade. Disciplines on these policies will need to be given further consideration in the new investment working group that the WTO Ministerial Conference decided to establish in December 1996.
The TRIMs Agreement is scheduled to come up for review within five years of the entry into force of the WTO Agreement and efforts should be made to incorporate appropriate new rules to address such additional policies at that time.
<Column> Efforts to Establish New Rules Regarding Investment
Auto: Automotive sector
Figure 8-4 shows direct investment around the world for 1996 and 1997. Worldwide outgoing investment in 1997 reached $423.7 billion (an increase of about 22 percent over the previous year) as a new record and continues to increase. Developed countries were the driving forces behind this, accounting for about 80 percent of the world's outgoing investment and 60 percent of incoming investment. Developing countries reached their highest level of outgoing and incoming investment.
Figure 8-5 illustrates trends in the flow of direct investment between Japan, the United States, and major Asian countries in 1997. In particular, the figure shows that direct investment from Asian newly industrialized economies (NIEs) to China and ASEAN countries is remarkable, indicating that investment climates in these areas are improving.
<Figure 8-4> Direct Investment around the World (Unit: $1 billion)
Source: World Investment Report 1998 UNCTAD
Local Content Requirements
Korea's "Import Source Diversification Programme" constitutes a de facto ban on imports from Japan. The application for importation of items designated under the system must include both a contract and a commitment to deliver goods approved by the Korean Trade Agents Association. Because approval is generally difficult to obtain, imports are effectively banned. (See Chapter 3 on Quantitative Restrictions.) When importing parts required for the production of final products that have been designated for production technology development by the Ministry of Trade and Industry, manufacturers are exempt from the requirement to submit the above-mentioned contracts and delivery commitments only if the following conditions are met: (1) they submit a "parts procurement plan" to a specified certification institution; (2) they apply to that institution for permission to import the required parts, and (3) they are given a recommendation from the head of the institution. The certification institutions only provide recommendations for companies that they confirm are following the domestic production ratios specified in their parts procurement plan. This system functions as a local content requirement by offering an exemption to the contracts and delivery commitments (which themselves effectively constitute an import ban) as an incentive for companies to adhere to the domestic production ratios. The system, therefore, seems to be inconsistent with the TRIMs Agreement. Items have gradually been moved off the designated items list in subsequent years. Further, at the time of its membership in the OECD, Korea committed to full elimination of the programme by the end of 1999. In addition, at the end of 1997, the government of Korea reached an agreement with the IMF on measures to reinforce its economic reform programme including the elimination (by the end of June 1999) and in June 1998, Korea announced items to be struck off the list.
Local Content Requirements
Since before the WTO came into force, Indonesia has imposed local content requirements in the automotive sector (see Chapter 2 for detail). In addition, Indonesia also requires that set percentages of domestic products, such as soybean cake and fresh milk, be consumed. Both measures are local content requirements falling under paragraph 1(a) of the Illustrative List annexed to the TRIMs Agreement. There are indications that the local content requirements in fresh milk have been abolished at the beginning of 1998, although the WTO has not been notified of it.
The Government of Indonesia notified the measures regarding the above two items to the WTO. It however announced on 31 October 1996 that it would withdraw its auto-related notification on the grounds that the local content requirements in its auto sector did not constitute a TRIM within the meaning of the Agreement. Those measures that the WTO has been notified of are not in contravention of the Agreement, but Japan must still watch that they are not expanded and that they are eliminated on schedule.
The National Car Programme, which was introduced in 1996, is the measure that gives an advantage in proportion to achievements of local content requirements. A panel was established in June 1997 by the requests of the United States, EU, and Japan. (For details see Chapter 2.)
Local Content Requirements
The TRIM notifications of the Thai Ministry of Industry detail a variety of minimum local content ratios for cars and automotive products assembled in Thailand. For example, the local content must not be less than 54 percent for passenger cars and not less than 70 percent for motorcycles.
The Thai government has established additional requirements for commercial vehicles. For example, certain items used in commercial vehicles must be sourced locally (e.g. tires, batteries, springs, seats, radiators, etc.).
In addition, one-ton commercial pickup trucks are viewed as "mass-market vehicles" and are therefore subject to special local content regulations. Those with an "E chassis" (in which there is no body beyond the doors) must have a local content of 65 percent and must also gradually increase the local content of their engines.
Under the Investment Promotion Act, the Board of Investment (BOI) sets local content requirements for television picture tubes, motorcycle engines, diesel engines for agricultural use, paper, dairy products and other items.
The WTO has been notified of these measures and they are not in contravention of the agreement, but Japan must still watch that they are not expanded and that they are eliminated on schedule. The Thai government previously announced that the local content requirement for passenger cars (at least 54 percent mandatory) would be eliminated in July 1998. However, it later decided to extend the period from July 1998 to January 2000 due mainly to its economic recession arising from various reasons, including collapsed domestic industries. This decision is to be regretted since this requirement had been expected to be eliminated before the expiry of the transition period under the TRIMs Agreement.
Local Content Requirements
In lieu of its previous domestic content requirements, the Malaysian Government imposed new domestic content guidelines effective from 1 January 1992. According to the guidelines, domestic content requirements will rise from 20 percent in early 1992 to 60 percent for passenger cars and 45 percent for commercial vehicles by the end of 1996. (See Figure 8-6.)
<Figure 8-6> Guidelines for Local Content in Malaysia
Local Content Requirements, Import/Export Balancing Requirements, Export Restrictions
On 12 December 1997, India announced a new automotive policy that requires manufacturers in the automotive industry and the Ministry of Commerce to draft and sign a memorandum of understanding (MOU) on new guidelines for the industry. The policy has the following problems in relation to the TRIMs Agreement. First, the policy requires that 50 percent local content be achieved within three years of the date on which the first imported parts (CKD, SKD) were cleared through customs, increasing to 70 percent within five years of first clearance. Second, the policy requires that exports of automobiles or parts begin within three years of start-up, with the possibility of restrictions on the amount of parts (CKD, SKD) that can be imported depending on the degree to which the export requirement is met. This amounts to an export/import balancing requirement. Even prior to this policy, India had a history of making auto parts import licenses for companies setting up operations within its borders conditional upon signing MOU containing local content requirements and export/import balancing requirements--despite the lack of any legal basis for doing so. It is certain that the new automotive policy of 1997 is designed to institutionalize the previous administrative guidelines. In the TRIMs Committee held in March/September 1998, some countries - including Japan, the EU and the United States - argued that the policy would not be regarded as compatible with the WTO Agreement. Subsequently, in October 1998 the EU requested consultation - Japan and the United States participate in the consultation as third parties - and the first consultation was held in December 1998. The government of India should eliminate the policy as soon as possible.
In addition, India has had export restrictions on agricultural products and industrial goods since 1991, and in 1986 imposed local content requirements for penicillin and other pharmaceuticals. The WTO has been notified of these measures and they are not in contravention of the agreement, but Japan must still watch that they are not expanded and that they are eliminated on schedule.
Local Content Requirements, Foreign Exchange Restrictions
The Philippines has imposed local content requirements and foreign exchange restrictions as part of its passenger car, commercial vehicle, and motorcycle development plans. The local content requirements and foreign exchange restrictions differ according to engine displacement for passenger cars, according to shape and weight for commercial vehicles, and according to whether two or three wheels are used for motorcycles.
The Philippines imposes local content requirements in coconut-based chemicals (soap and detergent). The WTO has been notified of these measures and they are not in contravention of the agreement, but Japan must still watch that they are not expanded and that they are eliminated on schedule.